By  on July 9, 2008

Several mainstream giants have made significant sourcing changes, reflecting a shift that may cause more companies to reconsider their supply chain models in the second half of 2008.

This spring, Liz Claiborne Inc. decentralized its sourcing, giving each of its more than a dozen brands control over its own manufacturing decisions, while creating a centralized sourcing leadership team. After taking over Kellwood Co. at the beginning of the year, Sun Capital Securities Group LLC shuttered the vendor's Hong Kong-based sourcing operation, Kellwood Trading Ltd., to consolidate and outsource its manufacturing to Li & Fung Ltd. Tommy Hilfiger sold its global sourcing operations last year for $247.8 million in cash to Li & Fung, which has plans to nearly double its business by 2010.

"Sourcing today is more complicated than ever," said Rick Darling, president of Li & Fung USA. "Sourcing can't be just good — it must be great to deal with the six or seven remaining retailers."

Sourcing costs are increasing by as much as 20 percent, as the Chinese economy develops and workers demand higher pay. The Chinese government is also making a concerted effort, partly through eliminating tax incentives, to move the low-pay manufacturing industry out of the lucrative coastal regions where 10,000 to 15,000 factories have closed since the Chinese New Year on Feb. 7, Darling said. For Darling, the answer isn't moving to lower-wage countries such as Bangladesh, Vietnam or Cambodia, as much as moving to other parts of China.

The weak dollar only exacerbates costs for U.S. companies manufacturing in China, many of which report that Chinese factories won't provide them quotes on costs until the final order is made because of currency fluctuations.

These sourcing cost increases couldn't come at a worse time for vendors. Between rising prices for gas and food and devaluations of home prices and stock portfolios, mainstream consumers are more cost conscious than ever. Vendors will likely find it tough to pass on the price increases and still get full price at retail — all of which will force mainstream manufacturers to look for ways to optimize their sourcing, whether that means outsourcing or realigning their supply chain.

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